EUR/SEK: Deeper and down? – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, suggests that the lack of unanimity amongst policy setters combined with the strength of recent economic data has been sufficient to convince many investors that the Riksbank is now probably finished with policy easing and this view has driven up the value of the SEK by almost 2% vs. the EUR since the December 21 policy meeting. 

Key Quotes

“The move in the exchange rate is likely to be unwelcome at the central bank.  Last month the Riksbank foresaw a path of only gradual appreciation for the SEK and warned that “an overly rapid appreciation of the krona could dampen import prices and the demand for Swedish exports and make it more difficult to bring up inflation.” While the Riksbank has acknowledged the improvement in economic activity in Sweden, the December policy statement still made liberal use of unequivocally dovish language and warned that “the Executive Board is still prepared to make monetary policy more expansionary if the upward trend in inflation were to be threatened and confidence in the inflation target weakened”.  This tone was probably aimed at undermining the outlook for the SEK.”  

“Since Sweden is very open economy its supply chains are entwined into the global economy.  The value of its exchange rate is therefore of prime importance.  Despite the comfort offered by a relatively soft exchange rate, the tough external environment has acted as a constraint on wages in the export industry which plays a leading role in collective bargaining. This has restrained domestic demand and inflationary pressures. That said, the unemployment rate declined to 6.2% in November 2016 from a cyclical high of 9.2%.  Tightening labour market conditions suggests there is potential for wages to move higher and inflationary pressures to build.”

“Already the extreme low interest rate environment has created a significant boost to property prices and a simultaneous increase in household debt.  Last year’s decision by the Riksbank to move rates into negative territory triggered a wave of criticism about the vulnerabilities that could be created in the household sector. While macro prudential policies have taken on greater importance in Sweden, the risk of asset bubbles is also likely to act as a constraint on further easing from the Riksbank going forward.”  

“Stronger December CPI inflation data in Germany and in the Eurozone (1.1% y/y) and a revival of the debate about the timing of ECB tapering going forward may limit the speed of SEK gains vs the EUR in the near-term.  That said, the relative strength of Swedish activity data combined with the perception that the Riksbank owns too large a slice of the domestic government debt market supports the notion that the Riksbank will be forced to end its QE programme ahead of the ECB.  EUR/SEK is currently being supported by the 200 day sma at 9.5151.  A break below could trigger a move towards the September low near 9.4750.  We expect a move towards 9.30 in the second half of the year.”